Can the industry avoid being scrutinised by CAG?

Impending audits of telecom service providers and Delhi’s power suppliers point to the failure of sector regulators to address consumer concerns and governance issues, says A K Bhattacharya.

For civil servants keen to remain relevant with a post-retirement job, the lure of the office of the Comptroller and Auditor General of India or CAG appears to have just become a little more irresistible.

Last Monday, the Delhi High Court ruled that the CAG could audit the accounts of private telecom service providers. Such audits, however, will be limited to their revenues and they will not inquire into other issues such as financial prudence or economy in carrying out the service providers’ expenditure.

On the same day, the Delhi government set the ball rolling for a CAG audit of the three private-sector power distribution companies in the capital.

The implications of the two developments are significant for both CAG and the way the ownership pattern of businesses in this country has evolved over the last few years.

Effectively, the high court order could pave the way for regular audits of all projects set up on a public-private partnership (PPP) basis.

So far, CAG’s audits could extend beyond state-owned enterprises on a few rare cases where there would be a specific instruction under the relevant provisions of the law.

That is how the accounts of the Delhi International Airport Private Limited and Reliance Industries Limited’s production-sharing contracts for eight gas blocks in the Krishna-Godavari basin on the east coast came under the purview of CAG’s audit.

But, now with the high court order, it is likely that the scope of CAG’s audits could automatically expand to include all projects in which the private sector is a majority player with the government owning a minority share.

What, however, is debatable is whether the CAG’s office has the infrastructure support in terms of an adequate number of trained chartered accountants and auditors to examine a host of new corporate entities that could come under its purview.

Thus, while CAG’s role means a clear boost to the career ambitions of civil servants, it would also pose a new challenge to the government in procuring and deploying a larger number of trained auditors to cope with the new task.

It would both be a challenge and an opportunity for the government to upgrade the skills of CAG’s auditing staff either through retraining or lateral induction of qualified professionals from the auditing and accounting industry.

Not surprisingly, therefore, there have been howls of protest over what industry perceives as CAG’s overreach, prompted by the judiciary in the telecom case and by an activist government in power.

Delhi’s power companies, run by two of India’s major corporate groups - the Tatas and the Anil Ambani-led Reliance Power, have argued that they were governed by the electricity Act and were subject to an audit by the sector regulator or the Delhi Electricity Regulatory Commission. So, what was the need for a CAG audit?

Similarly, industry bodies have questioned the court order saying that there was no room for a CAG audit of private telecom operators.

Indeed, FICCI President Sidharth Birla went on record to say that CAG was set up to audit businesses owned by the government and it could audit a private enterprise’s accounts “only if there is a contract between a private company and the government in this regard”.

Whatever be the problems associated with CAG’s audits or the methods used by it, the more pertinent question is whether industry can really avoid being scrutinised by the government’s auditor. The simple answer to this question is: No.

The government draws adequate powers from Section 20 of the CAG Act to direct an audit of a specific private company by CAG. Obviously, such audits can take place only when there is a specific instruction to that effect.

However, with a large number of projects being set up with government as a minority shareholder and a revenue-sharer, the logic of a CAG audit for all such entities can hardly be questioned. After all, government money or equity is involved and, to that extent at least, the government’s auditor has the right to scrutinise the accounts.

The larger question is whether bringing the private sector outfits or those operating on a PPP model was an outcome of persistent weaknesses in the government’s regulatory system in general.

In the last two decades of economic reforms, the government has set up a number of regulators to ensure competition and the healthy growth of the players in various sectors - power distribution, telecom services, insurance and civil aviation.

The objective of the exercise has been to ensure that consumers of these services can ultimately reap the benefits of both fair competition and growth. Specific laws have also been framed to empower the regulators to discipline the errant service providers and scrutinise their accounts.

Even as industry wails about the entry of CAG to audit accounts of PPP projects, the government and the regulators must answer a critical question. Is it their collective failure to adequately address consumers’ concern about a wide range of service-related issues responsible for the judiciary or an activist government in Delhi forcing a CAG audit on some of them?

CAG may not be the cure-all for the ills that afflict PPP projects and is perhaps a sub-optimal solution to the problem. But would there have been the need for getting CAG to audit such projects if the regulators and the private players had been proactive in addressing genuine concerns about governance and service delivery?

The way forward would be to strengthen the regulatory system to ensure better governance response from such companies. Once that is done, the so-called spectre of CAG will disappear on its own over a period of time.